InterDigital: An "Under The Radar" 5G Stock With Long-Term Upside

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InterDigital (IDCC) designs and develops technology that is integral for wireless communications. The company has 300 engineers and develops technology in cellular wireless, advanced video coding, and artificial intelligence (AI). 

It currently holds around 32,000 patents related to the above areas. It’s been one of the pioneers in terms of breakthroughs in wireless technology and research as it’s been patenting technology since 1972 that has been building blocks for the growth of the industry. Currently, IDCC holds essential patents for 5G networks, Internet of Things (IOT), and Machine to Machine communication. It also holds patents related to AI and video transmission. 

AI, IOT, and 5G are some of the fastest-growing parts of the economy. Companies with exposure to these industries like Nvidia (NVDA), AMD (AMD), and Ubiquiti (UI) have been some of the best-performing stocks over the past couple of years. 

IDCC is one way for investors to get exposure to these themes through their patents. Unlike many tech stocks, IDCC is reasonably valued despite its upside and long-term growth prospects.  As these sectors grow larger, the value and opportunities of these patents will grow. 

The 5G Boom

Currently, wireless technology makes up the bulk of IDCC’s revenues. IDCC has been involved in the development of wireless technology from the first mobile phones. And, it’s playing a part in 5G adoption.

5G is the next generation of wireless technology and will allow for speeds up to 20 GBs per second which is 20x faster than the peak speed of 4G. Another difference is that 5G signals are more accurate which will allow for more devices to be supported by the network.

This improvement is necessary for multiple reasons. More people continue to create and stream content on wireless devices. Companies are storing their data and running applications from the cloud. Next-generation technology like machine learning, AI, IoT, and autonomous driving will need to always be connected and come with considerable bandwidth needs. 5G is the infrastructure that ensures that technologies will be available and widely distributed. 

IDCC is a top 4 holder of patents related to 5G and has a nearly 8% share of essential patents. 

Wireless Technology

$340 million out of IDCC’s total 2020 revenue comes from its wireless technology segment. Some of its major customers include Apple (AAPL), Samsung, and LG. The company also has a deal in the works with Huawei, although it’s unclear about the exact size of this business. Overall, this means that IDCC’s patents are used by 50% of the smartphone market. 

In terms of future growth, IDCC expects its wireless technology revenue to grow to over $500 million over the next couple of years. In addition to increasing revenues from existing customers, it anticipates more revenue from smartphone manufacturers like Lenovo, Xiaomi, and TCL as these companies make 5G devices.

Consumer Electronics

IDCC expects that revenue from consumer electronics will grow to $150 million over the next five years. Most of the segment’s revenue will come from TVs but other sources are set-top boxes, computer monitors, personal computers, laptops, and streaming devices. Major customers include Sony (SNE), Samsung, and LG. 

Its most frequently licensed patents to relate to advanced video coding and transmission technology using artificial intelligence. Essentially, IDCC’s technology is used to help TVs connect to other devices and allow for the seamless transport of video wirelessly. 

IoT & Infrastructure 

Another part of the economy that’s expected to grow rapidly in the coming years is IoT. With IoT, all sorts of devices from household items to medical implants will be connected to the web. This also feeds into the 5G boom as the increased speed and capacity of these networks will be necessary to handle the increased load. 

In 2017, IDCC started Chordant which is a platform to help operators, companies and public authorities manage IoT devices in Smart Cities. IoT-connected devices are being used in cities to monitor pollution, improve mobility, and ensure safety. Chordant is a tool to analyze and collect data as well as manage each device to increase the value of the network.

This area is currently not a major revenue source for IDCC. However, it believes that IoT will contribute about $50 million in revenue annually in the next five years. 

Financials

To value IDCC, an investor must look at the company’s current cash flows from existing licensing arrangements and also assess the potential future value of patents that will be monetized in the coming months. 

IDCC’s business model gives it some advantages. It has steady and stable cash flows that are not going to fluctuate depending on the economic climate. It also has thousands of patents in areas in high-growth areas. The company also has a long history of successfully developing and commercializing its patents. While the world adopts 5G, IDCC is already working on 6G.

The stock has a significant upside given that its costs are stable and revenues are expected to increase by more than 100% over the next five years from $340 million to $700 million. Earnings are also expected to increase at a 29% rate from $60 million to $216 million.

In terms of costs, one large cost for IDCC is the enforcement of its patents. And, its biggest risk is that it won’t be able to successfully do so especially with foreign companies with different intellectual property laws. However, so far, it’s been successful in making its claims with companies like Huawei and Xiamoi, although there’s talk about how it would fare with smaller foreign, companies. 

POWR Ratings

According to the POWR Ratings, IDCC is a Buy. It has an “A” for Industry Rank and “B” for Trade Grade and Buy & Hold Grade. Among Semiconductor & Wireless stocks, it’s ranked #45 out of 86.

Conclusion

IDCC gives investors exposure to some of the fastest-growing industries including 5G, streaming video, and AI. However, many of these companies in these areas have already seen significant gains and trade at lofty multiples. In contrast, IDCC has lower-risk due to its cheap valuation, stable revenues, and low cost. 

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IDCC shares were unchanged in after-hours trading Thursday. Year-to-date, IDCC has gained 11.77%, versus a 11.46% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.

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